Burger King Backers to Avoid U.S. Anti-Inversion Penalty

Rather than take shares in the new combined Canadian company, 3G Capital will swap its majority stake in Burger King for interests in a related Canadian partnership that can be converted into stock. William Ackman, the New York hedge-fund manager, disclosed a personal stake in 3G in 2012. Photographer: Scott Eells/Bloomberg

Aug. 26 (Bloomberg) -- The group of investors who control
Burger King Worldwide Inc. are using an unusual strategy to
avoid the tax penalty that normally applies to shareholders of
companies that shift their legal address out of the U.S.

The plan was disclosed today as part of Miami-based Burger
King’s $11 billion stock-and-cash deal to buy Tim Hortons Inc.
and adopt that coffee chain’s Canadian headquarters. The
transaction is the first “inversion” announced since President
Barack Obama called the strategy an “unpatriotic tax loophole”
in late July and ordered regulatory changes to curb them.

Rather than take shares in the new combined Canadian
company, 3G Capital, an investment fund with offices in New York
and Rio de Janeiro, will swap its majority stake in Burger King
for interests in a related Canadian partnership that can be
converted into stock, the companies said in a statement today.

“Having the partnership units will defer taxes until an
ultimate sale,” Burger King Chief Executive Officer Daniel
Schwartz said on a conference call with analysts today.

The move enables the group of investors to avoid the so-called Helen of Troy regulations, a 1996 rule crafted by the
U.S. Treasury Department to discourage inversions, a strategy
that can help American companies avoid corporate-level taxes by
reincorporating abroad. The rule imposes a tax on the
shareholders of inverting companies, requiring them to recognize
a gain on the value of the stock when it’s converted to a share
of the new foreign company.

Limited Availability

Other Burger King investors will also have the option of
swapping their shares for partnership units, although the total
amount is limited. Those who receive shares in the Canadian
corporation will have to pay tax on any gain.

Burger King executives said the acquisition, which creates
the world’s third-largest fast-food company, isn’t motivated by
taxes, and that they expect their effective tax rate to remain
about the same following the acquisition. Still, one U.S.
senator, Senator Sherrod Brown, an Ohio Democrat, has already
recommended avoiding Burger King restaurants.

3G was co-founded by a group of Brazilian investors
including the billionaire Jorge Paulo Lemann. William Ackman,
the New York hedge-fund manager, disclosed a personal stake in
3G in 2012. 3G’s managing partner is Alexandre Behring, the
executive chairman of Burger King who will continue in that role
for the merged company.